Flashdrive Pricing

Industry Feels Effects Of Global Supply Chain After Japan Earthquake
By: Staff
From the March 2011 issue of PPB magazine

As PPB Newslink reported last week, more than 40 percent of the world’s USB flash drive supply is produced in Japan. In fact, one major supplier, Toshiba, supplies 30 percent of the world’s memory chips alone. When the tragedy unfolded in Japan due to the history-making earthquake and tsunami, memory prices jumped by 50 to 60 percent overnight – literally.

It wasn’t the actual lack of demand that caused the spike in memory costs, but a market panic, according to some suppliers.

Fear Caused Price Increase
Flash memory is a global commodity, much like oil. Its pricing fluctuates with supply and demand.

“The memory is used in thousands of products,” explains Joel Schaffer, MAS, CEO of Randolf, New Jersey-based Soundline, LLC (UPIC: 1SOUNDLN ). “It’s an issue of supply and demand. If, for example, Apple is launching the latest iPhone, there will be a run on memory due to demand.”

“The price of memory was the lowest in 2008, and has increased hundreds of times since then. If Toshiba had been damaged, it would have caused shockwaves in the industry, but the reality is that Toshiba did not have any significant damage to its major manufacturing facilities,” says Alex Harrod, sales manager for Cumming, Georgia-based LogoIncluded (UPIC: 15111613), where USB flash memory drives make up 68 percent of its business. “Production was interrupted due to power shortages and participation in rolling blackouts. But I heard that this slowed their production by less than four percent.”

Long-Term Effect Unclear
As these industry experts point out, this fear is induced by what is unknown. While NAND (a type of flash memory) producers such as Toshiba were largely unaffected, what is in question is the damage to component and material suppliers. As Harrod noted in a recent LogoIncluded blog post, “…there have been supply chain disruptions for wafer manufacturers and other electronic component manufacturers.”

“Because we’re part of a global supply chain, we all feel the effects. What was surprising last week when the earthquake and tsunami hit Japan was how instantaneously we felt these effects in the supply chain,” says Schaffer.

He gave one example of the extent of reach in the global supply chain. Two of the primary chemicals used to coat CDs during the manufacturing process are ultimately produced in Japan. While Soundline’s vendor sourcing for CDs is “three-deep” as Schaffer says, “they all go to the same well” for components such as these chemicals.

Shelbyville, Tennessee-based Shepenco (UPIC: SHEPENCO) communicated a similar supply chain issue to its customers in an e-mail last week. Some of the pigments used to manufacture its ENCORE ATTITOOD pencils and pens came from Japan the e-mail reported. The supplier was forced to change to a USA supplier for pigments, which will vary the colors slightly and possibly increase the price.

In addition to the effect on manufacturing components, the issue is going to get complicated down the road by transportation because of demand for fuel and for capacity. As Schaffer explains, “Where there were maybe 10 container ships going to Japan every day, there will now be 30 ships, for example. Lumber and other suppliers are going to have to be shipped to the country so there is less availability to ship product back and forth. This, compounded with the spike in oil and fuel prices, leads to an uncertain impact on supply and pricing.”

Communication Is Key
With an unknown future, what can suppliers and distributors do today? The key is to communicate up and down the supply chain. Shepenco proactively communicated to its customers as soon as it began to feel the effects on its products. Soundline has pulled all pricing off its website and search engines related to affected products, asking customers to call to confirm availability and pricing.

“We are able to get inventory as needed, and are able to ship orders within normal lead times. Prices remain good for today only as things could still change very quickly, but rest assured we are still doing everything in our power to continue to produce your orders quickly, efficiently, and to minimize the financial strain for our valued distributor partners,” states Harrod on the latest LogoIncluded blog entry.

And Gary Biron, manager of vendor relations for Lewiston, Maine-based distributor Geiger (UPIC: geiger), is tweeting to the Geiger sales force, posting the latest supplier information on its intranet site and proactively contacting customers.

“As a result, our sales team has been able to be proactive with their clients. The response has been very positive, and customers have either gone ahead and ordered products in order to get current pricing or they’ve decided on a different item,” says Biron.

Instant, constant communication is key to managing a global market that is changing by the minute. And as these changes occur, PPB Newslink will continue to cover the effects on the promotional products industry.

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